Beyond the Hobbies: The Economics

of Collectibles Trading
Dec 2023 | Team: TrendSetters (Nishant Sangal & Sandeep Singh)
TABLE OF CONTENTS
Abstract
Understanding Collectibles
Collectibles as Alternate Investments
Collectibles Life Cycle
Trading in Action

Arcesium to the Rescue

Database of Collectibles
Data Enrichment
Valuation

Financing
Other Services
Way Forward
Conclusion

References

LIST OF FIGURES
Fig. 1. Average annual real returns
Fig. 2. Index Performance (Jun 2018 through Dec 2018)
Fig. 3. Collectibles life cycle
Fig. 4. Total volume and value of NFT sales per week
ABSTRACT
Collectible trading has been in existence since centuries and is older than any form of
traditional financial trading. Good returns over the time and more formalization and
sophistication of the industry are inviting many investment managers to look at collectibles as
financial asset rather than just a hobby, and the trend is ever increasing. Being an evolving
market, collectibles trading comes with a lot of challenges in terms of availability of the
collectible, their fair market value, trading commissions etc. Further, the asset life cycle has
its own differences from a conventional financial asset. In this paper, we are focusing on the
collectibles market, its challenges and how Arcesium can leverage its expertise and experience
in solving these challenges for investment managers.

1 UNDERSTANDING COLLECTIBLES
Collectibles trading started with the riches’ hobby, who invested their wealth in something that
they could hang on their walls or display to admiring neighbors. These items range from
racehorses to classic cars, vintage watches, art, music collectibles, sports collectibles, and
handbags. The generation demographic changes from baby boomers to new generation (GenZ)
if furthering the cause of collectibles.

2 COLLECTIBLES AS ALTERNATIVE INVESTMENTS

Collectibles are emerging from hobby items to financial assets. The markets emerged even
better during COVID-19, as people were already losing money in other financial assets, they as
well invested in the things of status symbol.
Collectibles have generated substantial returns over the past century. As per a study,
collectibles have generated better real returns than gold and silver, some even better than
bonds as illustrated below in Fig 1.

Fig. 1. Average annual real returns 1 Fig. 2. Index Performance (Jun 2018 through Dec 2018) 2
In the recent times also, collectibles have performed better than conventional asset classes.
Fig 2 represents the performance of a collectible index created by the marketplace Rally Rd.,
showing a peak during COVID-19. This has sought the attention of Alternative Investment
Managers and Mutual Funds, beyond hobbyists. Collectibles market is estimated to be a
whopping USD 100 billion-dollar industry. With more participation from financial industry, the
market is becoming more sophisticated inviting even more participation, thus leading to a self-
fulfilling prophecy. Marketplaces like Rally Rd. are offering SEC regulated securities, both as
collectibles IPO and secondary market trading. The evolution of the indu stry is leading to the
entry of marketplaces like PWCC, WhatNot, etc. and participation from rating agencies and
insurance companies, making the industry as advanced as any other financial markets. Further,
collectibles don’t attract any taxes until sold, thus making them even better financial asset
option.

3 COLLECTIBLES LIFE CYCLE

Fig. 3. Collectibles life cycle

The life cycle of a collectibles trade starts with the selection of the required asset and might
continue for decades until the asset is sold off, with each event having its own risks and
challenges.
1. Selecting the right collectible involves a lot of attributes mainly the passion of the
collector, however, selecting the same for the sole purpose of financial investment adds
a lot more complexity to the process. The non-availability of indices in each segment of
collectibles make it a difficult choice to track. Historically, rare art and music
collectibles have been a hotshot with good returns, whereas sports collectibles feature
some seasonality.
2. Pricing a collectible either to make the trade decision or to value an existing position is
not straightforward. These assets hold a huge ‘rarity premium’ over the materialistic
costs of the asset.
3. The selection of the right trading platform impacts one’s decision to buy or not buy the
asset. The transaction costs are too high ranging up to 30%-40% of the asset value. The
assets are generally available through a particular marketplace or auction house only.
4. Theft and robbery are big risks once a collectible is acquired. Storing the asset and
insuring adds to the carry cost.
5. To finally sell the asset, you need to be matched to a buyer having the same perceived
value for the asset.
4 TRADING IN ACTION
Let’s try to understand the trading of collectibles taking an example of sports card trading
through PWCC marketplace (which is a major marketplace for cards trading). PWCC facilitates
the trading through the below events.
1. Monthly auctions: To generate greater interest from the collectors and celebrities from
a particular sport, they conduct monthly auctions for specific sports to bring the
interested stakeholders together at the same time.
2. Flash auctions: Flash auctions are conducted if a seller wants to sell the card off cycle.
The reason could be to cash the opportunity in case a player has performed well in the
recent matches.
3. Fixed price sales: They list the cards on the website at a fixed price and can be
purchased like any other online shopping.

The sellers list the cards on PWCC marketplace which are then added to the digital vault . Cards
are then graded by agencies based on the conditions, rarity, and authenticity. Major grading
agencies in this segment include Professional Sports Authenticators (PSA), Beckett Grading
(BGS) and SGC grading. Cards with higher ratings fetch a multifold premium.

5 ARCESIUM TO THE RESCUE

Arcesium can help investment managers manage the entire cycle of collectibles trading. This
will open a new segment of customers that Arcesium can serve. Listing the below solutions that
can be delivered to solve the challenges involved.

5.1 DATABASE OF COLLECTIBLES

We can setup connectivity to leading global marketplaces and auction houses to create
centralized global reference data available to all clients, thus giving the clients access to a
large population of assets. The assets can be modelled as securities (SPNs) internally, with
customized attributes including (but not limited to) the marketplace, rating agency
certification, etc.

5.2 DATA ENRICHMENT

We can offer further enrichment on the asset data through feeds from multiple external
vendors. A database of trading platforms and their corresponding charges can be setup, similar
to markets.

5.3 VALUATION
As discussed in the previous section, valuation is quite a challenge when it comes to
collectibles. The returns on collectibles are dependent on below attributes 3.
1. Relative attractiveness of collectibles compared to other asset classes such as stocks,
bonds, gold, and real estate.
2. Trends in wealth inequality, the geographic distribution of wealth, and wealth/GDP.
 3. Changes in preferences and popularity of a collectible compared to oth er and newly
emerging collectibles and stores of value.
4. Novelty/adoption premium associated with a new collectible.

Arcesium can add a lot of value by setting customized pricing models to arrive at the estimated
value of the asset, in addition to prices being fetched to external sources. This will not only
help arrive at the correct unrealized P&L but also help clients in taking investment decisions.

5.4 FINANCING
We already manage financing on other financial asset classes. Collectible assets can also be
financed using the asset as the collateral. We can utilize our platform to manage the financing
on the positions.

5.5 OTHER SERVICES

Other services include generic portfolio services like trade settlements, collateral
management, financing fees settlement, etc.

6 WAY FORWARD (NON-FUNGIBLE TOKEN)

With the enhancement of technology, we are seeing an increase in the trading of digital
collectibles or technical known as non-fungible tokens (NFTs). The estimated market of NFT
collectibles had already reached USD 8.57 billion by the end of 20214. Fig 4 below demonstrates
the weekly sales of NFT from 2021 through early 2022. Although we see some decline in Q1
2022 as compared to peak in Aug and Sep 2021, the numbers are still higher as compared to Q1
2021, showing an upward trend.

Fig. 4. Total volume and value of NFT sales per week 4

Given the upward trend in the volumes, traditional auction houses like Christie’s, Sotheby’s
and Phillips have already entered the market. These three auction houses now represent 10%
of the total crypto art volume.

Like other collectibles, NFTs also benefit from more wealth, strong sentiments, and improved
liquidity. Investors saw a bit of consolidation in 2022 due to several reasons like Russia Ukraine
war, monetary policy tapering etc. However, the trend toward metaverses and the exploration
of these platforms for business and entertainment should continue to move forward with a more
fundamental basis rather than the past year’s speculative growth.

7 CONCLUSION
Collectibles trading has already passed the test of time. The purpose behind the trading might
show a shift from passion to financial gains, but the market will not vanish for centuries as
passionate collectors will keep on fueling the segment. Arcesium can add great value to
investment managers managing their collectibles portfolios. The offering in this segment also
fits Arcesium’s long term goals of expanding in new markets as well as be a data first platform.

8 REFERENCES
1. “The long-term returns from collectibles”, The Economist, Feb 22, 2018
2. Rally Rd., a marketplace for collectibles
3. “Long-Term Expected Return of Collectibles”, Asset Class Trading, Feb 02, 2022
4. As per data industry tracker NonFungible.com, cited in “Collectibles amid heightened
uncertainty and inflation”, June 2022, Credit Suisse Research Institute